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Why are Individual Investors in a Better Position Than Warren Buffett?

The phrase “Cash is King” is deeply rooted in many investors’ minds. And when one looks at the cash balance of Berkshire Hathaway Inc (NYSE: BRK.A), one will be surprised (or perhaps not) by the amount of cash the company generates every year.

And it’s just sitting there. Idly. Counterintuitively, as an investor, having too much cash poses issues, too.

For a company like Berkshire Hathaway, which has a huge amount of assets and cash, it has been giving Warren Buffett (the Oracle of Omaha) a lot of headaches.

In this article, I’ll explain why retail investors, who may not have so much cash, are actually in a better position than Warren Buffett.

How much cash is a lot?

Berkshire Hathaway was reported to have a US$137 billion cash balance at the end of March 2020.

This is more than the market capitalisation of AIA Group Ltd (SEHK: 1299) and is equivalent to around 75% of Ping An Insurance Group Co of China’s (SEHK: 2318) market capitalisation.

What it also means is, that to generate a 10% return, you need to achieve an absolute return of US$13.7 billion in a year. It implies that you can only go after big investment deals in order to achieve a mere 10% return.

Otherwise, the returns from the smaller deals wouldn’t move the needle out of this massive cash balance, no matter how high the investment yield is.

However, it’s extremely challenging to find good, multi-billion-dollar deals. At the end of the day, you don’t want to invest for the sake of just getting rid of your cash.

Investment strategy change

Given the above, over the past years, we have seen a change in Warren Buffett’s strategy.

Coined as one of the greatest value investors the world has ever seen, he has been focusing more and more on outright acquisitions instead of picking stocks to invest in.

It definitely helps when it comes to acquiring a company if you are a good value investor and see value that others fail to see.

But acquiring a company is much more complicated and difficult to execute than picking stocks to invest in, especially with the help of the technology sector in the latter.

As an owner of the business (not just a minority shareholder anymore), you will now have to set strategy and work with the management to execute it.

You will now have to negotiate with the unions and ensure everything is compliant with the local regulations. You can’t just sit, wait, and sell shares to profit. Even the process of selling can take years to materialise.

Why are you in a better position?

For investors, especially those in Hong Kong, we actually have one of the most liquid and efficient public markets in the world to invest in with our idle cash.

We can invest in any stock where we see great value and potential. We can buy the shares of AIA and Ping An any time and expect to have a decent return.

With Warren Buffett’s US$137 billion cash balance, he will have to buy the whole of AIA or Ping An outright, to be able to put the cash to work and have returns that matter to him.

Not that it’s impossible, but it’s highly unlikely that he can do it, given the potential cost and time involved if a transaction like this is to happen.

The factors you need to consider when it comes to acquiring AIA and Ping An are very different from simply investing in them (e.g. regulators’ approval, convincing the board and the shareholders to sell the shares).

Little do we know, with the limited cash that we have, we have more “execution-able” investment opportunities than Warren Buffett.

Foolish conclusion

As investors in Hong Kong, we should really treasure the investment opportunities and tools that we have in the city, and the culture Hong Kong offers when it comes to investing.

For us, there is no excuse for not putting our money to work.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alec Tseung doesn't own shares in any companies mentioned.